2025 (5) TMI 1971 - HC - GST

Cancellation of Goods and Services Tax (GST) registration with retrospective effect from 01 April 2022 - no reasons assigned in SCN - violation of principles of natural justice - HELD THAT - The absence of reasons in the original SCN in support of a proposed retrospective cancellation as well as a failure to place the petitioner on prior notice of such an intent clearly invalidates the impugned action. Thus the writ petition is entitled to succeed on this short ground alone. The writ petition is allowed by modifying the impugned order and providing that the cancellation of the petitioner s GST registration shall come into effect from the date of the SCN i.e. 16 May 2024 - The stipulation in the impugned order of cancellation to come into effect from 01 April 2022 is consequently quashed.

Summary

Issues Presented and Considered

The core legal questions considered by the Court in this judgment are:

• Whether the retrospective cancellation of Goods and Services Tax (GST) registration without prior notice or reasons in the Show Cause Notice (SCN) is valid under Section 29(2) of the Central Goods and Services Tax Act, 2017 (CGST Act).
• The extent and manner in which the power to cancel GST registration retrospectively can be exercised by the proper officer.
• The procedural fairness and requirements of reasoned orders when imposing retrospective cancellation of GST registration.
• The consequences and legal implications of retrospective cancellation on taxpayers and their customers, particularly regarding input tax credit.
• The validity of orders and appeals where retrospective cancellation is imposed without clear reasons or proper notice.

Issue-wise Detailed Analysis

1. Validity of Retrospective Cancellation of GST Registration Without Prior Notice or Reasons in SCN

The Court examined the statutory framework under Section 29(2) of the CGST Act, which empowers the proper officer to cancel GST registration from any date, including retrospectively, if certain conditions are met. However, the Court emphasized that this power is not absolute or mechanical but must be exercised with due application of mind and based on objective criteria.

Precedents such as Riddhi Siddhi Enterprises and Ramesh Chander were relied upon, where the Court held that retrospective cancellation requires the SCN and the cancellation order to clearly state the reasons for such cancellation and inform the taxpayer accordingly. The absence of any mention of retrospective cancellation in the SCN or the failure to provide cogent reasons in the cancellation order renders the exercise of power invalid.

The Court noted that in the present case, the SCN dated 16 May 2024 did not disclose any intent to cancel registration retrospectively from 1 April 2022, nor did the cancellation order provide sufficient reasons for retrospective effect. This procedural lapse violated principles of natural justice and statutory requirements.

The Court further observed that retrospective cancellation impacts the taxpayer and their customers significantly, as it affects the availability of input tax credit and may impose unintended liabilities. Hence, taxpayers must be given an opportunity to contest such retrospective action.

2. Manner and Limits of Exercising Power to Cancel GST Registration Retrospectively

Section 29(2) CGST Act allows cancellation of registration from any date, including retrospectively, if the conditions enumerated in clauses (a) to (e) are satisfied. However, the Court clarified that the power must be exercised judiciously and not routinely or mechanically.

Drawing from the judgments in Ramesh Chander and Delhi Polymers, the Court reiterated that the proper officer's satisfaction must be based on objective criteria and the order must be reasoned. The taxpayer's compliance history, the nature of default, and the consequences of retrospective cancellation must be considered.

For example, failure to file returns for a continuous period may justify cancellation, but not necessarily retrospective cancellation covering periods when returns were filed and compliance was maintained. The Court emphasized that retrospective cancellation should be reserved for cases where such consequences are warranted and intended.

3. Procedural Fairness and Requirement of Reasoned Orders

The Court underscored the necessity of reasoned orders reflecting the grounds and rationale for retrospective cancellation. Both the SCN and the cancellation order must clearly communicate the basis for retrospective effect to enable the taxpayer to respond adequately.

In the present case, the Court found the impugned order deficient as it failed to assign any reasons for retrospective cancellation, and the SCN did not indicate such intent. This lack of clarity and failure to provide opportunity to the petitioner violated principles of natural justice and statutory mandates.

Precedents such as Ramesh Chander and Delhi Polymers were cited to reinforce that orders lacking reasons or containing contradictory statements (e.g., stating no reply was submitted despite acknowledging a reply) do not qualify as valid cancellation orders.

4. Consequences of Retrospective Cancellation on Taxpayers and Customers

The Court recognized that retrospective cancellation adversely affects taxpayers and their customers, particularly by denying input tax credit on supplies made during the retrospective period. This consequence imposes significant financial and operational burdens.

Accordingly, the Court held that the proper officer must consider these consequences before ordering retrospective cancellation. Such cancellation is permissible only when the consequences are justified and warranted by the facts and law.

5. Validity of Orders and Appeals in Cases of Retrospective Cancellation Without Proper Grounds

The Court examined prior cases where appeals against retrospective cancellation were dismissed on grounds of limitation, despite foundational defects in the SCN and cancellation orders. The Court held that such procedural defects vitiate the entire proceeding and render appeals ineffective.

In the present case, the Court found the impugned order unsustainable and modified it to make the cancellation effective from the date of the SCN (16 May 2024) instead of the retrospective date (1 April 2022). This approach aligns with the principle that cancellation must be prospective unless justified otherwise with proper reasons and notice.

Significant Holdings

"The mere existence or conferral of that power would not justify a revocation of registration. The order under Section 29(2) must itself reflect the reasons which may have weighed upon the respondents to cancel registration with retrospective effect. Given the deleterious consequences which would ensue and accompany a retroactive cancellation makes it all the more vital that the order be reasoned and demonstrative of due application of mind."

"Registration cannot be cancelled with retrospective effect mechanically. It can be cancelled only if the proper officer deems it fit to do so. Such satisfaction cannot be subjective but must be based on some objective criteria."

"The show cause notice does not even state that the registration is liable to be cancelled from a retrospective date."

"Absence of reasons in the original SCN in support of a proposed retrospective cancellation as well as a failure to place the petitioner on prior notice of such an intent clearly invalidates the impugned action."

"The cancellation of the petitioner's GST registration shall come into effect from the date of the SCN i.e. 16 May 2024. The stipulation in the impugned order of cancellation to come into effect from 01 April 2022 is consequently quashed."

Core Principles Established

• The power to cancel GST registration retrospectively under Section 29(2) CGST Act is discretionary, not automatic, and must be exercised with due application of mind and objective satisfaction.
• Retrospective cancellation orders must be reasoned and supported by clear grounds communicated in the SCN and the cancellation order.
• Taxpayers must be given prior notice and opportunity to respond specifically to the proposal of retrospective cancellation.
• Retrospective cancellation has significant consequences, including denial of input tax credit to customers, and therefore must be justified and warranted by the facts.
• Orders lacking clarity, reasons, or containing contradictions are invalid and cannot sustain retrospective cancellation.
• Where retrospective cancellation is improperly imposed, courts may modify the effective date to the date of the SCN or later, ensuring procedural fairness.

Final Determinations on Each Issue

The Court held that the impugned retrospective cancellation of GST registration from 1 April 2022 was invalid due to absence of reasons in the SCN and cancellation order and lack of prior notice to the petitioner regarding retrospective effect. The order was quashed to the extent of retrospective cancellation, and the cancellation was made effective prospectively from the date of the SCN, 16 May 2024.

The Court reaffirmed that retrospective cancellation must be based on objective satisfaction, proper reasoning, and procedural fairness, and cannot be applied mechanically. The petitioner's GST registration was restored up to the date of SCN, subject to compliance with filing requirements. The respondents were free to initiate fresh proceedings with proper notice and reasons if warranted.